I’ve heard this is a good way to set your kid up for success and take advantage of compounding. One of the parts I always get caught up on when looking into it, is that your kid needs some form of taxable income, and whatever they contribute, you can match it.

If you have a child that is just a couple years old, how do you accomplish this? I can’t just say I pay her $3000 a year for picking a book to read each night…or can I?

  • @[email protected]English
    2•1 year ago

    It doesn’t have to be W-2 income, but that’s a lot easier than other options to justify to the IRS. But as long as the money is coming from someone not directly related to the child for work actually done, you don’t need a W-2.

    So if the child does modeling or other contract work, it counts. Birthday money and allowances do not.

    • @rootOPEnglish
      1•1 year ago

      I see. So how do most people do this for their kids? Do they report their income and have their children pay taxes?

      • @[email protected]English
        2•1 year ago

        You have to wait until your kid has earned income, and the max your kid can contribute is there earned income or the IRA max, whichever is lower.

        But an IRA isn’t the only way to help your kid save for the future. Here are some other options:

        • 529 - no taxes on gains if used for education expenses, and some states offer tax incentives
        • UTMA - basically a custodial account with tax advantages; the money will be in their name, so it could impact eligibility for financial aid
        • trust fund - a lot more flexibility for the parent on when and how the child can use the funds
        • Treasury bonds, like ibonds

        I’m sure there are others.

        Our plan is a 529 and an informal offer to match my kids’ IRA contributions until the leave the house. We’ll also offer to help in other ways, like a car for school (if needed), a down payment on a house (if wanted), etc. But aside from matching their IRA, we plan to retain control.

        • @rootOPEnglish
          1•1 year ago

          All very good advise; Thank you! I’m just trying to prepare so I can give the kiddo the things I never had. I will look into these more.

          • @[email protected]English
            1•1 year ago

            I hope you find something that works for you.

            I think the best advice I’ve heard is the airplane oxygen mask analogy. Make sure you’re set before helping others. You don’t want your kid to have a fully funded education and end up not being able to go because they’re stuck taking care of you. So make sure you have your own retirement and insurance figured out before worrying about your kid’s future.

            • @rootOPEnglish
              1•1 year ago

              Yes, very good point. I’ve been following the /r/personalfinance flow chart for a while, and it more or less focuses on your own retirement/ savings first.